A Project Report

Presented to the Faculty of the

School of Management & Entrepreneurship
AURO University
Surat

In Partial Fulfilments
Of the Requirements for the Degree of
Bachelor of Business Administration

Submitted by:
Shivani Sapra
Shyam Jariwala

Submit to:
Mr Ajay Kumar Yadav

Acknowledgement

We would like to take this opportunity to express our gratitude and regards to the module leader
Mr Ajay Kumar Yadav for his guidance and monitoring. We would like to thank him for the
constant encouragement he gave us throughout the semester. Moreover, his blessings, guidance
and time to time help will carry us a long way in the journey of life.
However, we take this opportunity to express our profound sense of gratitude to our college
AURO UNIVERSITY for its cordial support and the guidance and valuable information, which
helped us in completing this report. We are obliged to all the staff members of the college for
the valuable information they have provided in their respective areas. We are highly thankful
for their concern during the period of our project.
Thank you
(Group Members)

Introduction

Event derivatives are contracts, usually traded over the counter, speculating on the outcome of a
particular event, such as a major election or a sports match. They have only two outcomes,
paying either 100 % (if the trader correctly predicts the outcome) or zero (if he or she is wrong).
Although various entities had discussed launching event derivatives, the products really came
into the public eye at the Futures Industry Association (FIA) conference in 2005, when two
separate exchanges, the Philadelphia Stock Exchange (PHLX) and HedgeStreet, announced that
they intended to offer binary event derivatives. Neither exchange has been able to generate
enough liquidity for the products to really take off, although HedgeStreet still offers event
derivatives and has continued to add products to its list.[1] In February 2009 HedgeStreet
added binary options based on Initial Jobless Claims, European Central Bank Rate
Announcements on interest rates, and it plans to add Nonfarm Payrolls and Unemployment
Rate contracts to the roster

Meaning

Prediction markets (also known as predictive markets, information markets, decision

markets, idea futures, event derivatives, or virtual markets) are exchange-traded markets
created for the purpose of trading the outcome of events. The market prices can indicate what
the crowd thinks the probability of the event is. A prediction market contract trades between 0
and 100%. It is a binary option that will expire at the price of 0 or 100%.
Research has suggested that prediction markets are at least as accurate as other institutions
predicting the same events with a similar pool of participants.

History

Economic theory for the ideas behind prediction markets can be credited to Friedrich Hayek in
his 1945 article "The Use of Knowledge in Society" and Ludwig von Mises in his "Economic
Calculation in the Socialist Commonwealth". Modern economists agree that Mises' argument
combined with Hayek's elaboration of it is correct ("Biography of Ludwig Edler von Mises
(18811973)," The Concise Encyclopaedia of Economics). One of the oldest and most famous
is the University of Iowa's Iowa Electronic Markets, introduced during the 1988 U.S.
presidential election. The Hollywood Stock Exchange, a virtual market game established in
1996 and now a division of Cantor Fitzgerald, LP, in which players buy and sell prediction
shares of movies, actors, directors, and film-related options, correctly predicted 32 of 2006's 39
big-category Oscar nominees and 7 out of 8 top category winners. Hedge Street, designated in
1991 as a market and regulated by the Commodity Futures Trading Commission, enables
Internet traders to speculate on economic events.
Around 1990 at Project Xanadu, Robin Hanson used the first known corporate prediction
market. Employees used it in order to bet on, for example, the cold fusion controversy.
In 2001, Intrade.com launched a prediction market trading platform from Ireland allowing real
money trading between members on contracts related to a number of different categories
including business issues, current events, financial topics, and more. In trade ceased trading in
2013.
In July 2003, the U.S. Department of Defence publicized a Policy Analysis Market and on their
website speculated that additional topics for markets might include terrorist attacks. A critical
backlash quickly denounced the program as a "terrorism futures market" and the
Pentagon hastily cancelled the program.

Prediction markets are championed in James Surowiecki's 2004 book The Wisdom of
Crowds, Cass Sunstein's 2006 Infotopia, and How to Measure Anything: Finding the Value of
Intangibles in Business by Douglas Hubbard.
The research literature is collected together in the peer reviewed The Journal of Prediction
Markets, edited by Leighton Vaughan Williams and published by the University of
Buckingham Press. The journal was first published in 2007, and is available online and in print.
In John Brunner's 1975 science fiction story The Shockwave Rider there is a description of a
prediction market that he called the Delphi Pool.
In October 2007 companies from the United States, Ireland, Austria, Germany, and Denmark
formed the Prediction Market Industry Association, tasked with promoting awareness,
education, and validation for prediction markets.

Accuracy
Some academic research has focused on potential flaws with the prediction market concept. In
particular, Dr. Charles F. Manski of Northwestern University published "Interpreting the
Predictions of Prediction Markets", which attempts to show mathematically that under a wide
range of assumptions the "predictions" of such markets do not closely correspond to the actual
probability beliefs of the market participants unless the market probability is near either 0 or 1.
Manski suggests that directly asking a group of participants to estimate probabilities may lead
to better results.
However, Steven Gjerstad (Purdue) in his paper "Risk Aversion, Beliefs, and Prediction Market
Equilibrium," has shown that prediction market prices are very close to the mean belief of
market participants if the agents are risk averse and the distribution of beliefs is spread out (as
with a normal distribution, for example). Justin Wolfers (Wharton) and Eric Zitzewitz
(Dartmouth) have obtained similar results, and also include some analysis of prediction market
data, in their paper "Interpreting Prediction Market Prices as Probabilities." In practice, the
prices of binary prediction markets have proven to be closely related to actual frequencies of
events in the real world.
Douglas Hubbard has also conducted a sample of over 400 retired claims which showed that the
probability of an event is close to its market price but, more importantly, significantly closer
than the average single subjective estimate. However, he also shows that this benefit is partly
offset if individuals first undergo calibrated probability assessment training so that they are

good at assessing odds subjectively. The key benefit of the market, Hubbard claims, is that it
mostly adjusts for uncalibrated estimates and, at the same time, incentivizes market participants
to seek further information.
A series of laboratory experiments to compare the accuracy of prediction markets, traditional
meetings, the Delphi method, and the nominal group technique on a quantitative judgment task,
found only small differences between these four methods. Delphi was most accurate, followed
by NGT and prediction markets. Meetings performed worst. The study also looked at
participants' perceptions of the methods. Prediction markets were rated least favourable:
prediction market participants were least satisfied with the group process and perceived their
method as the most difficult.
A common belief among economists and the financial community in general is that prediction
markets based on play money cannot possibly generate credible predictions. However, the data
collected so far disagrees. Analysed data from the Hollywood Stock Exchange and the
Foresight Exchange concluded that market prices predicted actual outcomes and/or outcome
frequencies in the real world. Comparing an entire season's worth of NFL predictions
from News Futures' play-money exchange to those of Trade sports, an equivalent real-money
exchange based in Ireland, both exchanges performed equally well. In this case, using real
money did not lead to better predictions.
Hollywood Stock Exchange creator Max Keiser suggests that not only are these markets no
more predictive than their established counterparts such as the New York Stock Exchange and
the London Stock Exchange, but that reducing the unpredictability of markets would mean
reducing risk and, therefore, reducing the amount of speculative capital needed to keep markets
open and liquid.

Sources of inaccuracy

Prediction markets suffer from the same types of inaccuracy as other kinds of market, i.e.
liquidity or other factors not intended to be measured are taken into account as risk factors by
the market participants, distorting the market probabilities. Prediction markets may also be
subject to speculative bubbles. For example, in the year 2000 IEM presidential futures markets,
seeming "inaccuracy" comes from buying that occurred on or after Election Day, 11/7/00, but,
by then, the trend was clear.
There can also be direct attempts to manipulate such markets. In the Tradesports 2004
presidential markets there was an apparent manipulation effort. An anonymous trader sold short
so many Bush 2004 presidential futures contracts that the price was driven to zero, implying a
zero percent chance that Bush would win. The only rational purpose of such a trade would be
an attempt to manipulate the market in a strategy called a "bear raid". If this was a deliberate
manipulation effort it failed, however, as the price of the contract rebounded rapidly to its
previous level. As more press attention is paid to prediction markets, it is likely that more

groups will be motivated to manipulate them. However, in practice, such attempts at

manipulation have always proven to be very short lived. In their paper entitled "Information
Aggregation and Manipulation in an Experimental Market" (2005), Hanson, Opera and Porter
(George Mason U), show how attempts at market manipulation can in fact end up increasing
the accuracy of the market because they provide that much more profit incentive to bet against
the manipulator.
Using real-money prediction market contracts as a form of insurance can also affect the price of
the contract. For example, if the election of a leader is perceived as negatively impacting the
economy, traders may buy shares of that leader being elected, as a hedge.

Other Issues
Legality
Because online gambling is outlawed in the United States through federal laws and many state
laws as well, most prediction markets that target U.S. users operate with "play money" rather
than "real money": they are free to play (no purchase necessary) and usually offer prizes to the
best traders as incentives to participate. Notable exceptions are the Iowa Electronic Markets,
which is operated by the University of Iowa under the cover of a no-action letter from
the Commodity Futures Trading Commission, and PredictIt, which is operated by Victoria
University of Wellington under cover of a similar no-action letter.

Controversial incentives
Some kinds of prediction markets may create controversial incentives. For example, a market
predicting the death of a world leader might be quite useful for those whose activities are
strongly related to this leader's policies, but it also might turn into an assassination market.

Public Predictions Market

There are a number of commercial and academic prediction markets operating publicly.

By far the largest is Betfair which had a valuation in the region of 1.5 billion GBP in
2010.

The Iowa Electronic Markets an academic market examining elections where positions
are limited to $500.

IPredict is a prediction market in New Zealand.

Predictious is a bitcoin prediction market covering a variety of events.

Microsoft has launched Prediction Lab that initially focuses on 2014 U.S. Elections.

PredictIt is prediction market for political and financial events.

SciCast was a combinatorial prediction market that focuses on science and technology
forecasting.
Smarkets a prediction markets for sporting events.

Combinatorial Predictions Market

A combinatorial prediction market is a type of prediction market where participants can make
bets on combinations of outcomes. The advantage of making bets on combinations of outcomes
is that, in theory, conditional information can be better incorporated into the market price.
One difficulty of combinatorial prediction markets is that the number of possible combinatorial
trades scales exponentially with the number of normal trades. For example, a market with
merely 100 binary contracts would have 2^100 possible combinations of contracts. These
exponentially large data structures can be too large for a computer to keep track of, so there
have been efforts to develop algorithms and rules to make the data more tractable.
Decentralized Predictions Market
In 2015, decentralized prediction markets have been in development. These platforms utilize
block chain technology and crypto currencies to enable global betting. Augur has raised over $4
million USD in crowd funding for further development on the platform, making it one of the
top 25 crowd funded projects of all time.

Use by Corporations

The simExchange introduced a perpetual contract that it calls "stocks" to predict the
global, lifetime sales of video game consoles and software titles. These stocks do not expire
like most contracts on prediction markets because the founder, Brian Shiau, argued that
video game sales can continue for years. The premise for these stocks is that Shiau believes

the video game industry suffers from a "lack of comprehensive sales data" and he compares
the information problem of a game's sales to the information problem of evaluating a
company's market value. Hanson warns that such a system may not work if a connection is
not enforced. Keith Gamble has described the simExchange as a Keynesian beauty
contest and that financial markets have certain remedies such as company buy-outs that
cannot happen on the simExchange. Gamble concludes that such a prediction market can
work but will be confined to play money

Best Buy, Motorola, Qualcomm, Edmunds.com, and Misys Banking Systems are listed as
Consensus Point clients.

Hewlett-Packard pioneered applications in sales forecasting and now uses prediction

markets in several business units. Mentioned in academic publications from HP Labs. Also
mentioned in Newsweek. It is working towards a commercial launch of the implementation
as a product, BRAIN (Behaviorally Robust Aggregation of Information Network

Corning, Renault, Eli Lilly, Pfizer, Siemens, Masterfoods, Arcelor Mittal and other global
companies are listed as NewsFutures customers.

Intel is mentioned in Harvard Business Review (April 2004) in relation to managing

manufacturing capacity.

Microsoft is piloting prediction markets internally.

France Telecom's Project Destiny has been in use since mid-2004 with demonstrated
success.

Google has confirmed in its official blog that it uses a predictive market internally.

The Wall Street Journal reported that General Electric uses prediction market software
from Consensus Point to generate new business ideas

BusinessWeek lists MGM and Lions gate Studios as two HSX clients.

HSX built and operated a televised virtual stock market, the Interactive Music Exchange
for Fuse Networks Fuse TV to be used as the basis of their daily live television broadcast,
IMX, which ran from January, 2003 through July, 2004. The television audience traded
virtual stocks of artists/videos/songs, and predicted which would make it to the top of the
Billboard music charts. The first of its kind, Fuse Network and HSX won an AFI Enhanced
TV (American Film Institute) Award for innovation in television interactivity.

Starwood embraced the use of prediction markets for developing and selecting marketing
campaigns. Marketing department started out with some initial ideas and allowed employees
to add new ideas or make changes to existing ones. Then subsequently incentives based
prediction markets were leveraged to select the best of the lot.